EEA Mannheim 2015

Late summer is conference time. I’ll be travelling around a fair bit in the next weeks. At the moment, there is the annual congress of the European Economic Association here in Mannheim. Many of the leading economists of all disciplines are attending. The highlight will certainly be this year’s Nobel session by Jean Tirole from Toulouse. Whenever time allows I will share some of the papers that particularly caught my attention. Here are two from the first day:

Everyday shopping tells us that products often come in different package sizes at different prices. Think of, for example, shampoo or toothpaste. Usually, smaller package sizes are associated with higher prices per quantity. When a good like shampoo is storable this poses a puzzle to economists. Why would anybody want to buy the smaller package if you can just pile up shampoo at home? In econ lingo: “Storability constrains firms’ ability to implement price discrimination”.

The authors propose a very simple and credible explanation. Households might simply be cash-constrained and may not be able to buy large amounts of shampoo every time they go shopping, although that might be optimal. Data in the paper reveals that market shares of smaller package sizes went up during the financial crisis. Anecdotal evidence tells us that Unilever was introducing smaller sizes specifically during that period specifically to match consumer demand.

In terms of empirics the authors exploit different degrees of being cash constraint depending on the day of the month you go shopping, which is a proxy of how long ago the last payday was. At the end, the authors provide a counterfactual analysis in which they remove cash constraints in the model (for example by introducing a loan system). The somewhat surprising result is that consumers would not save more money by buying larger package sizes when not being constrained. They rather would put that money into additional consumption by buying higher quality products.

In many markets prices are dispersed which means that you can buy the same good at different prices depending on where or when you buy. The authors have a very illustrative example: the retail gasoline market. There are standard models of price dispersion following Varian (1980) or Stahl (1989) which assume a share of the population of consumers being informed about prices. These consumers will buy at the lowest price. The other share of consumers is uninformed about prices or does simply not care. A firm can charge these consumers a high (monopoly) price.

Theoretically these types of clearing house models predict an inverted-U-shape relationship between the share of informed consumers and price dispersion. If everybody is informed nobody wants to buy at a higher price and firms set prices low (equal to marginal costs). If nobody is informed instead firms charge everybody a high price. At intermediate levels only a firm has incentives to vary prices in order to extract a higher surplus.

The authors test this relationship on a very detailed data set about the Austrian local gasoline market. As a proxy for the share of informed consumers they use the number of commuters in a region. The rationale is that commuters pass many gas stations on their way to work and will refuel at the cheapest station whereas you will be loyal to your local station if you only leave your town once in a while. Their data contains detailed information about the routes of every commuter in Austria which allows to assign them to every station they pass on their optimal commuting path. I don’t want to imagine all the data work that went into this project.